Growing trade deficit backs up RBA worries

Australia has posted its widest trade deficit in more than four years on plunging commodity prices, reinforcing the Reserve Bank of Australia’s fear that declining income from the terms of trade will drag on the economy.

“Put simply, export income is easing and this will underpin lower national income, wealth and expenditure," said RBC Capital Markets senior economist Su-Lin Ong, a former Treasury official. The trade deficit worsened to $2 billion in August from a revised $1.5 billion in July, the Bureau of Statistics said.

The estimate for July was $556 million.

August was the eighth straight month of trade deficits, underscoring the RBA’s warning that the resources boom may end sooner, and lower, than expected.

Falling commodity prices are dragging down the terms of trade – a measure of income from exports – to levels well below what the federal government is counting on to return its budget to surplus this financial year.

The turmoil has unsettled resources companies, which have told the RBA they are reconsidering some investments and pulling back on others.

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Exports fell 3 per cent in August to $24.6 billion, outpacing a 1 per cent decline in imports to $26.6 billion.

The trade balance has been in deficit every month this year, in sharp contrast to the export-driven surpluses in 2011 and 2010, when China’s economy was supercharged by its stimulus after the global financial crisis.

The largest surplus was in August of last year, at $2.78 billion, according to ABS data.

Deutsche senior economist Adam Boyton said the 11 per cent drop in coal and iron ore’s 6.9 per cent slide accounted for all the drop in exports in August.

“Falling prices for bulk commodities have seen an end to the period of trade surpluses for Australia and this can be expected to continue for a while yet," Mr Boyton said.